December 31, 2016

Nifty 2017 - Where?

Where will the Indian markets head to in 2017? Will it be a bull run or a bear market? Or will it remain flat? In 2016, we saw the market trade in a high PE zone of 20+ for a long time. There was a period where we were trading at PE levels of 24+. The earnings didn't improve at all and the markets largely remained in the hope that earnings will improve. We had written this for Nifty's 2016 forecast - Click Here

THIS ARTICLE IS AN EXTRACT FROM OUR SPECIAL REPORT. To get your copy of the report, subscribe now for our free trial by Clicking Here .. Keep scrolling down to read more.

Will there be cheer?

This "hope" phase will soon be gone and reality will set in. Demonetisation will affect earnings for a couple of quarters and we can see a spike in valuation levels because of this. Although, the market will have discounted this and the focus will now be on the expected earnings. 2017 is the year when the reality of earnings growth will set in. We expect a recovery in earnings growth by Q3 of FY 17-18 and a definite trend to set in after that.

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FY

Quarter

Effect on
Earnings

16-17

3

Fall

16-17

4

Fall

17-18

1

Stabilize

17-18

2

Recover

17-18

3

Grow

We don't see the market hitting new highs in 2017. This push cannot come without any growth in earnings! The valuations are far too stretched and thus leave no more room for PE expansion. Throughout 2016, we have been talking of a time-wise correction in the market. The market proved us right by waiting at high valuation levels for earnings to catch up but in vain. The earnings never moved up. Experts justify these valuation levels on back of forward PE. They say that the market is discounting a 15% to 20% growth in earnings over the next 2 financial years. We don't see a 20% growth in earnings in the next 2 years at all, atleast not in FY17-18.

Fair value of Nifty:

In our special Nifty 2017 outlook report, we have given the fair value of Nifty based on expected earnings and fair value PE. The market is trading at a 20% premium as per our views. A premium can be justified in a high growth environment but not in a scenario where in we are witnessing a fall in earnings. Midcaps and Smallcaps are expensive and even they are seeing a fall in earnings, this is not the ideal scenario to start fresh investments. This was a major reason why we continued to hold a major part of our investments in debt funds.

Fairy Tale Year for Debt Funds:

2016 was the year of debt funds! 13% to 18% returns!! A bumper jackpot thanks to RBI's rate cuts and the demonetisation move. But we say this straight forward - This was a one off year for such returns in debt. Don't have such high expectations from debt funds. In a year from now, 7.5% will be the normal return expected from debt funds.

Should you start fresh equity investments?

If you are starting from scratch - Yes, you can slowly start now and add aggressively as valuations become cheap. But invest now only if you can hold it for 3 years or more from this stage. Otherwise, you won't get to see high returns. This is not a good time to invest your funds in equities for 1 year. There are a few stocks which you can buy at these levels. We do research on a lot of stocks and advise our clients on what to buy and in how much quantity. You can read our old reports and avail a free trial by clicking here

Summary:

We are mildly bearish on the markets as 2017 sets in. We are definitely not boycotting equities but rather we park our funds and wait for lower valuation levels to increase our equity exposure. We have given our fair value for Nifty in the report which is free for everyone to read.